Wednesday, December 9, 2009

Desperate Financial Times in Big D

Daniel Kaplan, writing in the December 7th issue of Sports Business Journal, is reporting that Tom Hicks, owner of both the Dallas Stars and the Texas Rangers, has been funding operating losses for the both teams from reserve funds that were set aside for interest payments to various banks that had provided financing for the clubs. Earlier this year, Hicks and his Hicks Sports Group company defaulted on a $525MM loan that was used for the purchase of the clubs.

Interest reserve funds are funds that are typically part of the original loan commitment by the lenders and are segregated funds that are set aside to meet any shortfalls that would prevent the payment of interest to the lenders. Normally, these reserve funds are "airtight" and can only be accessed under very limited conditions. It appears that this was not the case with the establishment of these funds and that Hicks could access these monies to fund operating shortfalls of the two clubs.

The amount of the reserve fund was $17MM. I use the term "was" because according to Kaplan, well placed sources have told him that these funds are nearly depleted. As I reported in an April 2009 post, all payments of scheduled principal and interest on the loans were stopped by Hicks in March of 2009 in an attempt to negotiate better terms. The lenders refused to budge, and according to their reading of the loan documents, could move to take control of the teams after within six months of the default. However, there was a consent letter signed by the lenders, Hicks, and the NHL that gave Hicks until the summer of 2010 to work out of this situation before the lenders could move on the assets. For now, Hicks has breathing room before he loses control of the teams to the lenders.

What is not known is how much of the losses that caused the depletion of the reserve fund are attributable to the Rangers and how much to the Stars. Hicks has not revealed the financial information on either entity, and as a private company, he does not have to do so. He has publicly stated that the Stars are not for sale; and he is attempting to sell an interest in the Rangers. Is it because the Stars are the healthier of the two teams and a more prized asset? Or is it because Hicks fears that given the current market and the financial condition of the Stars, he would face a sizeable loss if he sold the team?

The worst case scenario for the Stars and the NHL is that League will have to fund operating losses for the Stars. The League has been acutely aware of the financial situation in Dallas as they (the NHL) has had to give approval to Hicks each time he has drawn money from the reserve fund. The League and Hicks could also face legal action if the lenders believe that a good faith effort is not being made to cure the default on the loan. Either of the occurances could potentially create a Coyotes like situation in Dallas.

The situation in Dallas bears watching. It is not a financial situation that is solely attributable to the Stars, but they are entangled in the financial vortex that is the creation of Tom Hicks. For the good of the game, and the fans in Big D, let's hope they come out of this unscathed.